Purchase of large amounts of securities by institutional investors or private investors over time. Institutional investors purchase over time to prevent a run up in price which would increase their cost.
A technical indicator comparing the number of advancing stocks to declining stocks. The index is used by many traders to confirm an advancing or declining trend.
Allocating percentages of an investment portfolio between a variety of securities such as: stocks, bonds or cash to reduce the risk to a portfolio through diversification.
A measure of return on a given investment or portfolio over a period of a year expressed in terms of percent.
Simulated or hypothetical testing of a model or theory based on historical information.
A Bear Fund or Inverse Fund would move in the opposite direction of the Index it tracks. They are used to profit in a declining market. A 10% decrease in the Index would result in a 10% increase for the fund.
A period of time during which a broad number of securities and indexes have declined from 15% to 25% or more.
BIG CAP STOCK
A stock with a large numbers of shares outstanding, (owned by investors).. Examples of such stocks would be: Microsoft, General Motors, IBM, General Electric Corporation.
BLUE CHIP STOCK
A nationally known, public company which has a long term reputation for quality and excellent financial performance with regard to earnings, profitability and growth.
An investment instrument issued by an entity such as: a corporation, the U.S. Treasury, a government agency, or other corporate or private borrower to a lender. A bond usually pays interest at a specified rate periodically and the principal amount invested is repaid at maturity. Given the often large denominations of a given bond, these are frequently traded by institutional investors and/or are available to private investors through mutual funds that accommodate purchases of a pool of bonds and facilitate a variety of investment goals to the private and public investor.
A period of time during which a broad number of securities and indexes are rising.
BUY and HOLD
An investment policy that consists of the purchase of various types of securities and holding on to them for a long term, such as a year or more, rather than trading on short term indicators. It potentially exposes the investor to large losses during corrections during bear markets.
Closed-End Funds sell a fixed number of shares. Price is influenced by the supply and demand for the fund based on the market’s desire to purchase fund shares. The price per share is not always indicative of the value of the underlying assets. You may not always be able to sell shares you own at the net asset value as with an open-end mutual fund.
Commodities are items such as oil, copper, gold, soybeans, grain, metals, wood, cloth and beef. Many commodities are typically sold as futures contracts.
The process of an investment generating earnings over time that are reinvested and generate their own earnings. This creates a greater potential for increased cumulative profit over the life of the investment.
This is one or more psychological indicators used by some investors to indicate contrary market activity. When these indicators climb to one extreme or another, contrarians believe the market may be preparing for an advance or decline. A contrarian will do the opposite of what many investors may be doing at a particular moment in time.
When the general market or a stock, bond or index declines 10% or more.
How two or more securities move in relationship to each other.
The total return of an investment over a given period of time. This is calculated by compounding the gains during the entire time a specific security was owned and/or reinvested.
CYCLICAL STOCKS/INDUSTRY GROUPS/SECTORS
A stock that moves quickly in tandem with economic changes and business cycles, such as; housing and related building supplies.
A mutual fund family that offers Bull and Bear market funds suitable for active trading.
1. A general pattern where the price of a security or index has failed to increase on a higher volume day. This can be a negative indication of the price momentum of a security or index. It may occur when large institutions are selling stocks.
2. The removal of assets from a retirement account.
Diversification means to spread investment capital over various different investment vehicles, such as; real estate, stocks, bonds, mutual funds, cash, precious metals, etc. By diversifying, an investor potentially reduces risk by allocating capital to a variety of investment options.
DOLLAR COST AVERAGING
This investing technique consists of purchasing a fixed dollar amount of any given investment security over equal time intervals. This practice assumes that the fixed dollar amount will buy more shares when the price of the security is lower and less when the price of share may be higher.
DOUBLE LEVERAGE MUTUAL FUNDS
An easy way to leverage your investment power is through leveraged Mutual Funds. A Double Fund offers 200% leverage. They are also offered in leveraged amounts of 125%, 150% and 250%, all without the cost of margin. For example, if the benchmark it tracks increases by 1% the 200% leveraged Mutual Fund will increase by 2% or double.
DOW JONES INDUSTRIAL AVERAGE (DJIA)
This is a well known index quoted in most daily news and financial papers. It tracks the daily price performance of approximately thirty large-cap, blue-chip companies traded on the New York Stock Exchange and certain other exchanges, such as, the Nasdaq. The companies are added or deleted based upon the overall representation of the economy in the United States.
Earnings are analyzed for a given security or investment for a period of time (monthly, quarterly and annually). Earnings are a basic measure of a company’s ability to employ capital to sell a product or service to earn a net profit and grow. Capital may include any number of things, such as materials and goods, or human intellect and labor.
EARNINGS PER SHARE
Earnings per share indicates the profitability of a company and is one of the most important indicators in determining share price. Earnings per share (EPS) is calculated based on a company’s profits for a given period of time, divided by the number of outstanding shares of stock.
Exchange Traded Fund (ETF)
An Exchange Traded Fund is a pool of investment securities that track an index and trade much like a stock causing its price to fluctuate throughout the day.
EXTENDED (in price)
A term used to describe the point during which a stock may be increasing in price over a ‘pivot’ or buy point and may be considered too risky to buy.
Frequently Asked Questions
FEDERAL RESERVE BOARD OF GOVERNERS (THE FED)
This government agency monitors, regulates, and influences the U.S. monetary supply,. The FED does this by buying or selling government securities and imposing other regulatory actions that impact the cost of borrowing money. The FED influences the cost of cash reserves available to member banks and ultimately the ability of financial institutions to lend money at higher or lower rates to banks and government affiliated institutions.
FEDERAL RESERVE BOARD’S DISCOUNT RATE
This is an important market variable that represents what member banks pay to borrow money from the FED. A decrease in the borrowing rate (interest) encourages borrowing and increases the money supply. Alternatively, an increase in borrowing rates will discourage borrowing and reduce the supply available for member banks to lend over a period of time.
401(k) RETIREMENT PLAN
A qualified retirement plan established by employers to which employees make salary deferred contributions on a pre-tax basis. Employers may add matching contributions and or profit sharing. Similar to a Traditional IRA, earnings accrue tax deferred. Restrictions on salary deferred contributions are controlled by the IRS and or employee. There are limits on pre-retirement withdrawals and penalties for exceeding these limits. Investments may be managed by the employee or by a management company hired by the employer.
This type of analysis evaluates a company’s earnings, sales, balance sheet , market share, management, products and the industry as a whole.
Futures are speculative and potentially risky investment vehicles. This is a derivative product based on the value of an underlying equity, a commodity, etc. and should be evaluated thoroughly. A strong understanding of a given stock or other underlying investment vehicle is fundamental prior to trading a future. Futures are contracts based on delivery of a specific product at a certain time and price. Futures are generally traded in three areas: commodities, financials and various other indexes.
GENERAL MARKET AVERAGES and/or INDEXES
Indices that typically represent an overall picture of the stock market’s health. Some of the more common market indexes are the Dow Jones Industrial average, Nasdaq 100, Standards and Poors 500, Russell 2000, New York Stock Exchange, and the Chicago Board of Futures.
This is typically a mutual fund that specializes in growth stocks. The fund’s goal over the long term is to provide investors with capital appreciation. This type of fund tends to be more volatile; meaning it will rise quickly in a bull market but may also fall sharply in a bear market.
An index is a basket of a variety of investment securities or other types of trading vehicles. An index typically represents a particular segment of a market or group of companies. It might be a broad basket of stocks representing a particular country, such as the U.S. ( the S&P 500) or an exchange such as the Nasdaq. The composition of a given index is disclosed publicly so that the various components can be analyzed and understood by an investor.
INDEX EXCHANGE TRADED FUND
An Exchange Traded Fund (see ETF) that tracks a particular stock market index.
This is the plural of the term INDEX.
An industry group shares similar services or products and tend to be defined by particular sectors.
An institutional fund typically requires a minimum initial investment of $100,000 or more. Most investors purchasing this type of fund are doing so on a fiduciary basis. These types of fiduciary investments are usually made with public funds or by large companies that manage mutual funds on behalf of a pool of individual investors. This type of fund has a large purchasing power and can influence market prices, whether on an individual basis or as a market group.
INITIAL PUBLIC OFFERING (IPO)
The initial offering of stock and/or shares by a company. This is done in order to raise capital funds for a number of reasons. Shares are typically sold by investment banks, who ultimately resell the shares to the public through brokerage firms.
Institutional investors are responsible for most of the large volume activity in the broader markets. The impact of their trading to individual stock prices and markets as a whole is significant. These companies have large capital bases and tremendous liquidity potential. Examples of institutional investors are large mutual funds, banks, brokerage houses, insurance companies, and large pension funds, such as the CalPers, one of the largest pension funds in the United States.
These are the rates at which a bank and other entities, such as mortgage brokers, broker/dealers, and the government charge their customers to borrow money.
An Inverse Fund or Bear Fund would move in the opposite direction of the Index it tracks. They are used to profit in a declining market. A 10% decrease in the Index would result in a 10% increase for the fund.
There are several types of Individual Retirement Accounts: (1) Traditional, (2) Roth, (3) Educational. This type of investment account is regulated by the federal government. It typically is managed and maintained through a bank, brokerage, or other financial institution on behalf of the ultimate beneficiary.
A Traditional IRA is established by an individual. Contributions limits are defined based upon annual income and qualified contributions are tax-deductible until you, or the beneficiary begins drawing upon the assets. When contributions are withdrawn taxes would be based on your annual income. Additional contributions above your limit are taxable on a current basis, however, future growth is compounded tax-deferred until withdrawn. The benefit of an IRA is the initial tax deduction and that it grows tax-deferred until needed or drawn upon. The ability to deduct your contributions are based on income and whether or not you participate in an employee sponsored retirement plan, such as a 401(k). Generally, if you will be in a lower tax bracket after retirement, the Traditional IRA is a better investment vehicle then the Roth IRA.
The Roth IRA was named after Senator William Roth and approved by congress in 1997. It differs from a traditional IRA in many ways. Contributions are not tax-deductible, however, qualified withdrawals are tax free. Once invested in a Roth IRA, you should not need to be concerned about paying tax on the money or its returns.
Limiting the advantages of this particular IRA is an annual income limit of $110,000 as a single filer or $160,000 as a married couple. The Roth IRA does not require you to take distributions until you require the funds—this is opposed to a traditional IRA which requires withdrawals and tax consequences beginning at no later than 70 ½ years of age.
If you are in a low tax bracket today and expect to be in a higher tax bracket at retirement the Roth IRA may be a better choice for you. Review your situation with your accountant or tax advisor to decide which IRA is the most suitable.
An educational IRA is a savings fund that can be used toward helping pay for a child’s college expenses such as, tuition, other fees, books, etc. The monies in this IRA can’t be applied to retirement expenses. As long as the funds go toward the child’s education, the money grows tax free and may also be passed along toward other college bound siblings.
After the age of thirty, funds remaining in an Educational IRA may be subject to taxes and perhaps a penalty.
LAGGARD OR LEADER
These two terms refer to a company or industry group that is either outperforming or lacking the performance of others similar companies in the general market.
These terms can also refer to economic indicators that either give a future indication of where the various segments of the economic markets may be heading or and indication of where the various market segments have been, based upon economic data.
LEVERAGED MUTUAL FUNDS
An easy way to leverage your investment power is through leverage Mutual Funds. They are offered in leveraged amounts of 125%, 150%, and 200%, without the cost of margin. For example, if the benchmark it tracks increases by 1% the 200% leverages Mutual Fund will increase by 2% or double.
1. This fee is usually equal to about 0.05% per year, or up to about 1.0% per year and is charged by a mutual fund’s management company for administering and/or managing the fund’s stock portfolio.
2. A stock brokerage, hedge fund or financial advisor may charge a fee usually between 1% and 2% to manage large portfolios of their wealthiest clients.
This is an account that is established through a brokerage company. It allows you to trade based upon money borrowed from the broker to purchase various investment vehicles—typically stocks. The money borrowed is based upon the value of the equity in your stock holdings and sometimes the equity in your personal financial holdings. A margin account is also established based on your experience as an investor and the knowledge about margin trading you can demonstrate to your broker/dealer. Using a margin account allows you to leverage your current portfolio but requires a greater level of knowledge and dedication to the analysis of the investment vehicle and its performance with regard to the specific market as a whole. Risk and potential return increases as the percent of margin increases.
Margin trading is not for the inexperienced investor. It can allow you to increase the size of the investment, including the returns, gains, and losses. The knowledgeable trader can use this vehicle to trade long positions and short positions. However, margin trading increases the risk of eroding principal and equity quickly.
A phase that pertains to the general market achieving a bottom or low point and perhaps turning around toward a period of improvement or perhaps an upward trend.
A broker-dealer firm that holds shares of a security in order to facilitate trading in that security. A market maker competes for customers by displaying a buy and sell quotation, When the sale is received the order is filled with their own inventory or from an offsetting sale which can all happen in a matter of seconds.
A term used to describe trading based on objective buy and or sell rules of a technical trading system.
The rate of acceleration of a securities price and volume.
People that manage money for institutions. These people may be credentialed, such as: Certified Financial Professionals, Chartered Financial Professionals, or people such as Brokers or Dealers. This would also include such professionals that are affiliated with insurance companies, and pension funds. and other large public and private institutions.
MONEY MARKET FUNDS
Funds that invest in liquid investment vehicles such as cash, Treasury Bills and high grade government obligations.
A technical indicator that averages data such as stock prices over a given time period. A moving average is a lagging indicator of market performance.
A diversified portfolio of securities managed by professionals. The managers of a mutual fund usually charge an annual management fee. Management fees range as a percentage of the total portfolio dollar volume, or based upon the share value of the total portfolio’s market value. Mutual Funds allow investors to purchase a portfolio of securities based on a net asset value (NAV). The portfolio may consist of a variety of investment vehicles, depending on the goals and objectives of the fund. The NAV is determined on a daily basis, typically after markets close. Typically, NAV (see definition of NAV) is maintained at a value of $1.00 per share but may fluctuate based on the value of the underlying assets. These funds may be actively managed and/or track a particular index, such as the S&P 500 or the Russell 2000.
National Association of Securities Dealers Automatic Quotation System. The first electronic stock exchange created in 1971, which has approximately 5,000 companies listed. The exchange is home to many large high tech stocks such as Intel, Microsoft, Dell and Cisco.
This stock market index consists of 100 of the largest domestic and international companies listed on the NASDAQ exchange. (See NASDAQ COMPOSITE).
The Nasdaq is a widely quoted market index which includes all domestic and internationally based stocks that are listed on the Nasdaq exchange, approximately 5,000 companies.
NET ASSET VALUE (NAV)
The price of a mutual fund share, usually calculated at the end of a trading day. The NAV is the total value of a fund’s portfolio less its liabilities.
Corporate valuation determined by the book value of assets less liabilities.
NEW YORK STOCK EXCHANGE (NYSE)
One of the oldest and largest exchanges in the United States where buyers and sellers can meet via their brokers and the market makers to execute buy and sell orders. Located on Wall Street, in New York City, it was established in 1792. Acronym: NYSE.
A contract to buy a “Call” or sell a “Put” at a specified price per share. A contract price is based on a specified future time period or expiration date. Trading options is highly volatile and may involve significant risk.
This is a way to learn about the market without actually buying or selling stocks, options, mutual funds, or other investment vehicles. One tracks the market using a piece of paper or spreadsheet to get the “feel” of the particular investment without actually spending any money or letting emotions dictate decision making.
PRICE/EARNINGS (P/E) RATIO
This ratio measures the value of a stock by dividing the current price by its earnings per share over the past twelve months. The general theory is that if a stock’s P/E ratio is high, many investors may consider it pricy or overvalued. Stocks with low P/Es are often considered a good value. P/E ratios are often misunderstood and misused by many investors. Some market experts believe that the higher the P/E, the better the stock.
PRICE AND VOLUME CHART
These are graphs that show a stock’s price and volume history. This information typically graphs a stock daily, weekly, or monthly. Many professionals, especially institutional investors use this information to evaluate and assist in selecting stocks.
PROFIT AND LOSS STATEMENTS
This is a corporate quarterly or annual report that indicates the firm’s profitability and includes income and expense information.
PROFIT MARGIN (PRE-TAX AND AFTER-TAX)
This number gives an indication of a company’s profitability. It is calculated by dividing annual earnings by revenues and is displayed as a percentage. When a profit margin is increasing, it typically indicates a growing and more profitable company. This is calculated by dividing a company’s pre-tax earnings by revenues and may also be calculated in the same fashion using after-tax earnings and revenues.
A mutual fund family that offers Bull and Bear market funds suitable for active trading.
A formal printed statement released by a company or mutual fund required by the Securities and Exchange Commission (SEC). It contains information about the company’s business, strategies/objectives, business plans, short and long-term financial projections. In addition, information regarding risk, competition, management and other information pertinent to a prospective investor is included in such a document.
Now the QQQ, which is the ticker symbol for the Nasdaq-100 Trust, which is an Exchange Traded Fund that trades on the Nasdaq. This security offers broad exposure by tracking the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq. It allows you to mirror the performance of 100 companies with one purchase. Due to its large trading volume the QQQ is also very liquid allowing orders to be filled almost instantly.
A rally is an indication of a strong market upturn after a period of decline in price. A successful rally usually is identified by price increases on greater than average trading volume, over a sustained period of time. Rallies that generally do not hold, will pull back relatively quickly in price and volume.
A measure of a price trend that indicates the performance of a stock relative to the overall market. If the Relative Strength of a stock is increasing, the stock is probably outperforming a given market, such as the S&P 500 or Russell 2000. If it is trending down, it may be lagging the markets.
RETURN ON EQUITY
This is a standard indicator of a company’s financial performance which measures the efficiency of a company’s utilization of its funds and assets. It is useful in comparing the profitability of a company to other companies in the same industry. Computed by dividing Net Income by Shareholder’s Equity.
The risk an investor is willing to take with regard to losses to their portfolio.
A United States stock market index that comprises approximately 2000 small cap companies. The Russell 2000 is considered the Small Cap Benchmark in the U.S.
A mutual fund company that offers Bull and Bear funds suitable for active trading.
A group of securities from the same industry or markets. An area of the economy where businesses share the same or related services or products.
SECURITIES AND EXCHANGE COMMISSION (SEC)
This is the governmental agency established to oversee various security industries. It is charged with regulating and monitoring the activities of brokers, dealers and individual company’s and traders in the various financial markets. It is also referred to as a “governmental watch dog”.
This is an investor that holds an equity interest in a publicly held company. The company files financial reports and other information to assist potential investors and existing shareholders when evaluating the value of their investment. A shareholder may hold bonds, common stock, or other derivative products issued by the company.
This is when an investor closes out a short position and returns the borrowed stock to its owner and/or broker.
SHORT SELLERS (SELLING SHORT)
When an investor borrows shares of a stock from a broker, the investor hopes the stock’s price will fall. Ultimately, the investor must buy the borrowed shares at market price upon the expiration of the contract. Hopefully, upon the buy/sale of the borrowed shares, the sales price will be less than the purchase price and net the investor a gain.
The FundTrading System, depending on market conditions, will issue a Buy, Sell, or Cash signal.
Buy Signal: Indicates the market is trending higher. Buy the next trading day, which gives us a long position in the market. (If you are currently shorting the market, first cover your short position.)
Sell Signal: Indicates the market is trending lower. Sell your long position the next trading day. Take a short position to profit from down trending markets.
Cash Signal: This signal works as a stop order, which is used to protect your principle by minimizing risk. Sell your positions and wait until the next Buy or Sell signal is issued.
Stock issued by small companies with a relatively small number of common stock shares outstanding. The definition of small cap can very among brokerage companies but it is usually a company with a capitalization between $300 million and $2 billion dollars.
An acronym for the “Standard and Poor’s Depository Receipts” the ticker symbol is “SPY”. A SPDR is an Index Exchange Traded Fund that holds shares in the same proportion as all the companies in the S&P 500 Index.
A spread between the bid and asked price of a stock pertains to the amount that the market maker charges. This is also known as the cost of selling a stock on an exchange, excluding what a brokerage firm might charge a client for a trade. All stock on the larger markets (NYSE and NASDAQ) will vary in spread between the bid and ask price. (See Market Maker)
STANDARD & POORS 500 Index (S&P 500)
An index of the top 500 companies in the United States. This index is representative of the major industrial, transportation, utility, and financial firms. It is adjusted periodically to represent the economic composition of the major U.S. companies. Currently, it is weighted by market value and is composed of 400 industrials, 20 transportation companies, and about 40 utility and financial firms.
A security that represents ownership in a corporation. The purchaser of stock holds an unsecured claim on the assets of such corporation. It also entitles the owner to voting rights with regard to the governing board members. Stocks can be held on an individual basis and in the name of a trust estate. There are many other forms of ownership and also different classes of ownership known as common or preferred. Each form of ownership in a corporation represents a specific priority to a lien on the assets of such corporation.
A company that lists corporations and supervises the distribution and exchange (trading) of stocks. Most exchanges have a physical location with which to trade. Typically, there are traders on the “floor” of the exchange that manage the buying and selling of such stock (for instance, the New York Stock Exchange).
A market that facilitates the buying and selling of stocks issued by a company.The proceeds of such trading typically finance the company’s daily activities, or longer term financial goals.
STOP ORDER or STOP LOSS ORDER
This is an order that is executed when the price of a security falls relative to the stock price minimum set by the seller.
A method of evaluating prices, volumes, and various technical charts by analyzing statistics generated by market activity with the purpose of identifying patterns that can suggest future direction.
When looking for a particular stock, this is the symbol that identifies a security. For example, Microsoft Corporation is listed as: MSFT on the NASDAQ. General Electric Corporation is listed on the NYSE as: GE.
TRAILING STOP ORDER
A trailing stop order is set at a price below the current market price to lock in a profit or prevent further losses if the price declines unexpectedly.
The predominant direction of an asset or market .There are short, intermediate and long term trends. Identifying a trend can be very profitable as you will be able to trade with the trend.
This investment strategy involves analyzing various indicators such as price-to-earnings ratios, price-to-book value, and other financial indicators. The goal is to determine if a stock is undervalued and perhaps a “good” buy or overvalued and perhaps not a good investment given the financial information. This strategy focuses on fundamental information and not so much on technical information.
This is a measure of fluctuation in a market or equity during a given time frame. Volatility can be tracked by large and frequent price swings.
The number of shares or contracts traded in a security or market during a given period of time. It is an important technical indicator for determining supply, demand and market conviction.
Read the complete How to Trade Section for help in developing your FundTrading Strategy.